A collection of often sceptical, always candid observations and insights on the US economy and large-cap equity markets. Readers have observed my style and perspective to be that "the emperor has no clothes," and that is reasonably accurate.
Postings reflect my philosophies and perspectives on economics, business and politics.

Thursday, October 01, 2009

Xerox Apes Dell & Bids On A Service Provider

Earlier this week, a big business story was Xerox's bid to buy services provider Affiliated Services Corp.

"The mergers and acquisitions race is warming up. Xerox, the world's biggest producer of high-speed printers, said Monday it is bidding $6.4 billion U.S. for Affiliated Computer Services Inc. in an effort to expand into document services.

Xerox values ACS at $63.11 a share or a premium of 33 per cent over Friday's market close. "It's a game change for Xerox and the deal will provide stronger revenue and earnings growth," said Xerox's CEO Ursula Burns. It will triple its services revenue to $10 billion U.S. annually, she added,

ACS is the biggest supplier of managed services to the U.S. government and as an outsourcer operates in the telecoms, healthcare, education and retailing sectors. The merger offers annual synergies up to $400 million U.S. for the first three years.

Xerox offers $18.60 cash and 4.935 Xerox shares for each ACS share. The deal closes early in 2010 and CEO Lynn Blodgett will continue to run ACS."

Xerox currently has about $1.2B in cash on its balance sheet. By my arithmetic, they are offering about $1.8B in cash, the balance in Xerox equity.

When I read this story, I immediately thought of the recent Dell acquisition, at an outrageous premium north of 50%, of Perot Systems. I wrote in that post,

"Personally, I don't see it that way. Instead, Michael Dell, like so many other CEOs, can't let go. He should just sell or merge Dell to create a larger PC manufacturer. Let his shareholders buy a pure systems integrator play, or HP, if that's what they desire.

Michael Dell is using his shareholder's money to continue having a company to run. How he is going to make Perot something it can't be on its own should worry Dell shareholders. Perot could have borrowed money, were its business opportunities sufficiently attractive. If Michael Dell better knows how to run a systems integrator than do the senior management of Perot Systems, Dell could have grown its own unit, for much less money.

Much as I suggested for Kodak's shareholders, Dell's should be bringing a lawsuit over this egregious use of their money. "

I think Ursula Burns is doing the same thing. Mind you, as I wrote here, in May, I'm not exactly wowed by her to begin with. I wrote,

"Ann Mulcahy, CEO of Xerox, is retiring. Replacing her will be Ursula Burns. Who cares?

It doesn't take a genius to see that a company that mainly focuses on print technology in an increasingly virtual, online technology world is probably not going to become a consistently superior performer again. If it did, it would be a true exception.

As the price chart shows, Xerox hasn't had a sustained period of market outperformance in the period from 1978 to the present. This is a company whose 'go-go' years were the 1960s. That's 40 years ago.

When I think of Xerox, I think of the company that punted away truly promising technologies in its once-famed Palo Alto Research Center. You know, those ideas which Apple's Steve Jobs incorporated into his firm's breakthrough personal computers.

Why anyone would pay special attention to a changing of stewards of a once-dynamic, now merely-average, backwater technology firm, is unclear to me."

At least Burns isn't paying over 50% too much for ACS. It's only about 33% over current market value. Yikes!

You cannot tell me that Xerox shareholders would not have been better off to have received a $1B cash distribution, borrowed or used other funds, and bought ACS shares at the market.

As I asked in the Dell case, just what are Burns and Xerox going to do for ACS that it hasn't or can't do for itself?

As the nearby 5-year price chart for Xerox, ACS and the S&P500Index shows, the acquired firm has done a much better job of at least matching the S&P than Xerox has.

Other than cash, what can Burns hope to provide ACS? Schumpeterian dynamics have more or less shut the door on Xerox's days of consistent market-outperformance. So Burns' answer is to squander shareholder value on a better-run company, at a huge premium?

Looking at the past two years' performances of the same three- Xerox, ACS and the S&P500- the next chart illustrates that ACS managed to ride out the recent economic turbulence surprisingly well. Much better than the management of Xerox.

But how does this justify Burns throwing her shareholders' money at ACS? On this basis alone, she should be fired by the board.

After all, look at this second price chart. On Monday, the day the deal was announced, Xerox's price quickly lost about 20%, ending Tuesday still down 15%. ACS mirrored this in picking up similar percentages, indicating investors viewed the deal much as I do- a mistake for Xerox, a bonanza for ACS.

Whether ACS is a growth firm, and better managed than Xerox, is beside the point. There's nothing special that the two firms couldn't do via a marketing agreement, without the expensive premium. This deal is simply a way for Burns to guarantee herself a job by buying a better firm with her shareholders' money. But it won't make Xerox's core businesses any better, for the same reasons Perot Systems cannot magically stuff Dell products into each of its customer engagements. That is, if Dell wasn't a good alternative before, it's no better just because they are owned by the same firm. That's true for Xerox and ACS, as well.

No, this is yet another pointless acquisition of a decent company by a corporate has-been.

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About Me

A well-educated veteran of US corporate strategy positions & hedge fund management, as well as research, product development and project work in consulting, strategy and equity management. Academic background in marketing, strategy, statistics and economics.
Currently own Performance Research Associates, LLC, through which I am involved in proprietary equity and equity options investment management.